Hedging Coal Price Risk in a Deregulated Power Market Ginny Farrow - - PowerPoint PPT Presentation
Hedging Coal Price Risk in a Deregulated Power Market Ginny Farrow - - PowerPoint PPT Presentation
Hedging Coal Price Risk in a Deregulated Power Market Ginny Farrow Manager Rail Car Fleet NCCI Spring Conference Greensboro, NC April 12, 2007 Safe Harbor Statement This Presentation contains forward-looking statements within the meaning of
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Safe Harbor Statement
This Presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are subject to certain risks, uncertainties and assumptions and typically can be identified by the use of words such as “expect,” “estimate,” “anticipate,” “forecast,” “plan,” “guidance,” “believe” and similar terms. Such forward- looking statements include, but are not limited to, the successful implementation of our acquisition and repowering strategy, our environmental compliance strategy, our hedging profile, Big Cajun II – Unit 4 construction and our success in securing commercial arrangements for the output of the facility. Although NRG believes that its expectations are reasonable, it can give no assurance that these expectations will prove to have been correct, and actual results may vary materially. Factors that could cause actual results to differ materially from those contemplated above include, among others, general economic conditions, hazards customary in the power industry, weather conditions, competition in wholesale power markets, the volatility of energy and fuel prices, failure of customers to perform under contracts, changes in the wholesale power markets and related government regulation, the condition of capital markets generally, our ability to access capital markets, unanticipated outages at generation facilities, our ability to convert facilities to western coal successfully, adverse results in current and future litigation, failure to identify or successfully implement acquisitions and repowerings, the inability to implement value enhancing improvements to plant
- perations and companywide processes and the ability to manage coal price risk.
NRG undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors that could cause NRG’s actual results to differ materially from those contemplated in the forward-looking statements included in this Investor Presentation should be considered in connection with information regarding risks and uncertainties that may affect NRG's future results included in NRG's filings with the Securities and Exchange Commission at www.sec.gov.
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Agenda
NRG – Who are we? NRG Coal Portfolio Coal Procurement Strategy NRG’s Role in Repowering Future of Coal Procurement
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NRG: Platform Established for Multiple Growth Opportunities
Expanding and enhancing our core asset base drives value enhancing grow th
Capital Allocation: Capital investm ent Enhance and Expand Core Portfolio Extracting m axim um value from existing fleet
W est South Central Northeast Texas
Capital Allocation: Balance sheet m anagem ent FORNRG Com m ercial Ops. I m proved m arket design Texas Genco W est Coast Pow er Padom a W ind Repow ering I nitiative Environm ental Com pliance Fuel supply chain investm ent ( railcars) Portfolio Optim ization Free cash flow generation &
liquidity
Return excess capital
A regionally focused, multi-fuel, carbon-diversifed scale generator with assets across the merit order and around transmission in each of our core markets with the capability to procure, transport and trade all of the commodities involved in our business.
W hat w e strive to be:
Load serving entities in our core regions willing to contract for their bulk generation needs at a premium price in exchange for our assistance mitigating their customers’ aggregate electricity and fuel cost and transmission constraint risks.
Our target custom er:
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NRG: Portfolio with Scale and Diversity
South Central W estern Northeast Texas Com bined Scale2
Gas 5 ,4 8 0 MW 5 0 .9 %
Nuclear 1 ,1 0 1 MW 1 0 .2 %
Coal 4 ,1 9 5 MW 3 8 .9 % Gas 1 ,9 4 8 MW 1 0 0 %
Gas 9 0 6 MW 3 7 .8 % Coal 1 ,4 8 9 6 2 .2 %
Oil 3 ,5 5 6 MW 5 0 .0 %
Gas1 1 ,5 3 0 MW 2 1 .5 % Coal 2 ,0 2 9 MW 2 8 .5 %
Gas 1 0 ,4 4 2 MW 4 5 .7 % Coal 7 ,7 2 9 MW 3 3 .9 % Oil 3 ,5 5 6 MW 1 5 .6 % Nuclear 1 ,1 0 1 MW 4 .8 %
Asset scale and diversity of fuel and location provide value creation opportunities
1Includes Devon 10 reactivated June 29, 2006; 2Includes other North America capacity of 594 MW. For combined scale 3,419 MW
(15% ) is dual-fuel capable. Reflects only domestic generation capacity.
MW data as of Septem ber 3 0 , 2 0 0 6
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NRG: Existing Coal Portfolio
36MM tons – ranks us in the top 10 coal buyers in the US overall
and top 2 in the PRB
92% of our fleet has sourcing and transportation flexibility ~ 97% of transportation under firm contract through 2009 Extensive rail fleet with over 6,800 privately leased or owned rail
cars
Seasoned staff with experience in generation, coal production and
coal transportation – average 16 years in energy
Coal Sources
PRB Lignite CAPP Colorado Import Petcoke
Source: Company SEC filings, public presentations and Evelocity
Rank Com pany
Tons Coal ( m illions)
1 Southern Company
80.0
2 AEP
75.0
7 NRG ( current)
36.0
3 TVA
45.0
4 Duke Energy
44.3
5 Ameren
38.2
6 Berkshire Hathaway
37.0
8 TXU
35.3
9 Xcel
32.1
10 Edison International
24.0
Current
NRG’s coal portfolio features sourcing and transportation flexibility
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Coal Procurement Strategy
- Coal is always evaluated with emissions, Coal + SO2 + NOx
- Emissions Prices add additional complexity
- Without a scrubber, emissions represent 10% – 50% of the
cost of coal
- Significant arbitrage opportunities exist for trading around coal
qualities
Emissions are a key driver in optimizing our fuel mix
All Commodity prices based on 4/ 5/ 07 prompt month market Transportation costs are based on estimated industry average
H isto ric a l S p
- t S
O 2 P ric e $ $ 2 $ 4 $ 6 $ 8 $ 1 ,0 $ 1 ,2 $ 1 ,4 $ 1 ,6 $ 1 ,8 $ /A llo w a n c e
Coal Costs in $/MWh Delivered to PJM
$- $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00 $40.00 $45.00
CAPP 12500 1.6 lb SO2 Columbia Import NAPP 13000 3.0 lb SO2 PRB 8800 0.8 lb SO2
$/MWh SO2 Fuel & Transport
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Historical PJM Delivered Coal Prices
Transportation costs are based on estimated industry average
Optimizing coal portfolio requires flexibility
Historical Coal Price Delivered to PJM Coal + Transport + SO2 + NOx
$20.00 $25.00 $30.00 $35.00 $40.00 $45.00 $50.00 $55.00
18-Feb-2005 20-Mar-2005 19-Apr-2005 19-May-2005 18-Jun-2005 18-Jul-2005 17-Aug-2005 16-Sep-2005 16-Oct-2005 15-Nov-2005 15-Dec-2005 14-Jan-2006 13-Feb-2006 15-Mar-2006 14-Apr-2006 14-May-2006 13-Jun-2006 13-Jul-2006 12-Aug-2006 11-Sep-2006 11-Oct-2006 10-Nov-2006 10-Dec-2006 9-Jan-2007 8-Feb-2007 10-Mar-2007
$/MWh
CAPP PRB NAPP Col 11300 1%
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Historical PJM Coal vs Gas
All Commodity prices based on spot market Coal basis = CAPP; Gas basis = Dominion-South Point; Power basis = PJM West Hub Transportation costs are based on estimated industry average
Flexibility is even more important in a moderate natural gas price environment
PJM Dark Spreads vs Gas Spark Spreads
- $40.00
- $20.00
$0.00 $20.00 $40.00 $60.00 $80.00 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07
$/MWh
Peak Gas Spark Spread Peak Dark Spread Off Peak Gas Spark Spread Off Peak Dark Spread
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US Capacity A dditions
10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Year MWs by fuel
OTHER RENEW OIL NG NUKE HYDRO COAL NG Historical NG Forecast
Gas/ Coal Indifference Zone
U.S. Capacity Additions
Current
$0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10
A flight to natural gas in the first half of this decade is causing a flight back to coal in the second half
Repowering: Opportunity for Coal
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Repowering: NRG’s Role
Industry repowering presents growth opportunities for coal producers through partnerships with generators
Source: Company SEC filings, public presentations and Evelocity
Rank Com pany
Tons Coal ( m illions)
1 Southern Company
80.0
2 AEP
75.0
3 NRG ( after repow ering)
50.0
4 TVA
45.0
5 Duke Energy
44.3
6 Ameren
38.2
7 Berkshire Hathaway
37.0
8 TXU
35.3
9 Xcel
32.1
10 Edison International
24.0
Expected
New Build Site Gross MW Fuel Technology Operation
Big Cajun I 230 Coal/Pet Coke Fluildized Bed Boiler 2010 Indian River 752 Coal IGCC 2011-2012 Huntley 752 Coal IGCC 2012 Limestone 800 Coal PC 2012 Big Cajun II 775 Coal PC 2010
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Repow ering program s m ust be environm ental palatable
Baseload Alternatives Carbon Hedge Increased Credibility Increased Credibility Carbon Hedge Policy Outreach
- Responsible
Planning
- Phased, Certain
- Equal Treatm ent
Carbon R&D “Test Bed” Sequestration Bioreactor I GCC First Mover Nuclear Expansion W ind Pow er
2 0 0 5 2 0 1 5 Per Mw h ~ 0 .9 tons/ Mw h ~ 0 .7 tons/ Mw h1 w / I GCC CO2 sequestration
NRG’s Carbon Pentagon
Note: includes impact of 2,700MW of nuclear, 2,250MW of IGCC, 1,800MW of coal, 3,100MW of gas and 1,000MW of wind. All MW are before any potential equity sell down.
1 Assumes full impact of 2,700MW at STP. With only 44% ownership of STP,
carbon intensity would be ~ 0.06 tons/ Mwh higher
NRG Fleet: Projected Carbon I ntensity
Repowering: Environmental Considerations
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Demand shift from
Central Appalachian to Illinois Basin and import coal due to declining reserves, high mining cost and scrubber installations
Increased demand
encouraging new mine development and expansion in these basins
SO2 allowance cost is less relevant Transportation cost is key New plants will focus on regions where transporters are willing
to lock in long-term contracts at attractive prices
Illinois Basin begins to look attractive, particularly for water
served plants
Clean coal technology changes fuel choices
Future Coal Procurement Strategy
Without Scrubber With Scrubber 2 0 0 9 Coal Prices Delivered To PJM as of April 5 , 2 0 0 7
PRB 8800 0.8lb SO2 IL Basin 10500 6.0lb SO2
Scrubber VOM SO2 Allowances Transportation Fuel Scrubber VOM SO2 Allowances Transportation Fuel
PRB 8800 0.8lb SO2 IL Basin 10500 6.0lb SO2
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Transportation continues to be a major driver in selecting the optimal coal supply Reliability and price are both important Import coal deliveries have proven to be reliable Recent disruptions in the US rail infrastructure have changed the risk profile of domestic coal Transportation contracts should be structured to minimize risk of supply interruption and allow for flexibility and coal price optimization Target inventory levels based on operational risk Coal transportation flexibility allows for reduced coal inventory investment
Transportation
Diversify your fuel mix – transportation flexibility is an effective way to manage operational and price risks
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In Summary…
Managing coal price risk is more than procurement
– Emissions are a major driver in coal selection – Use long term contracts to lock in spread – Optimize by trading around long term contracts – Fuel diversity is key
Managing operational risk continues to be a major
focus
– Structure transportation contracts to facilitate portfolio
- ptimization
– Transportation diversity reduces operational risk
Coal choices will change with emission control
technology
– Emission allowance cost no longer a factor – New builds will drive market for lowest cost delivered Btu
Optimizing coal plant profitability requires fuel and transportation flexibility
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